Peer to peer - get by with a little (insurance) from your friends

P2P is the new kid on the insurance block and it’s a bit of a game-changer. In a nutshell, P2P insurance works by having a group of like-minded individuals (like friends or family) with similar interests team up to pool their money (in the form of premiums) to insure against a particular risk.

So, P2P insurance is basically a social form of insurance. Everyone in the group pays a fee and if someone in the group needs to make a claim, the cost of the claim is paid with the money collected in a pool. If you go a certain period of time without needing to make a claim, then many P2P companies give you a percentage of your money back!

With traditional insurance, customers pay premiums to an insurance company to protect them against the risk that something might go wrong. If something does go wrong, then the customer makes a claim and the insurance company pays some or all of the cost of fixing what went wrong.

With traditional insurance — just like with P2P — insurance companies use the premiums their customers pay to cover the cost of claims. But if you don’t make a claim, you don’t get any of your money back — you just continue to pay premiums even if you never make a claim.

Getting some of your money back is one of the bonuses of P2P insurance, but there are also other awesome things it does differently.

When everyone in an insurance pool knows each other, people are less likely to make claims that aren’t totally legit (i.e. exaggerating the amount of damage or pretending you’ve had something stolen when really you just lost it). With traditional insurance, when people make false claims, insurance companies need to make that money back somehow, so they make up for it by charging all of their customers higher premiums.

But if you’re in an insurance pool with your mum, sister or best friend, you probably won’t be so keen to rip them off by making an exaggerated or false claim. And when people are making fewer claims, it makes your premiums cheaper!

Because many of the P2P insurers are operating online, they also don’t have the massive costs of staff and buildings, or old technology, like traditional insurance companies, and this tends to make their costs a bit cheaper too.

There are some big players around the world that are really taking the insurance industry by storm, including Friendsurance — a German company that really kicked off the P2P movement and offers group members a reward if they don’t make a claim for a year. Friendsurance actually works with your Facebook account, letting you group together up to 10 friends for your pool of money.

Lemonade is an American company who also use P2P. Rather than give your money back at the end of the year, they focus on helping others, letting users choose which deserving charity they want to get any of the leftover money. Nice!